Despite years of falling prices, increased
travel options, and vigorous industry competition, some federal
policymakers appear to be on the brink of abandoning the incredibly
successful 20-year experiment in airline competition following
deregulation in the 1970s. On April 6, the U.S. Department of
Transportation (DOT) released a "Proposed Statement of Enforcement
Policy on Unfair Exclusionary Conduct by Airlines" to remedy
alleged anti-competitive practices within the industry. This
proposed enforcement policy specifically targets efforts by major
carriers to offer consumers significant discounts in order to
compete with smaller carriers or new entrants. If such fare wars
hurt the smaller companies or drive them from the market, DOT will
take action against the larger carriers.

The
DOT claims that these steps will "ensure that free market
principles and competition continue to thrive in commercial
aviation," and says that its proposed enforcement policy "does not
attempt to regulate the market in any way." 1The reality, however, is far
different. "No matter how they cut it, this policy puts government
bureaucrats in the business of setting fares and determining the
level of service in the market," argues Carol Hallett, president of
the Air Transport Association of America. 2As James L. Gattuso, vice
president for public policy and management at the Competitive
Enterprise Institute (CEI), observes, "The message is, don't
compete too hard; don't lower your prices too much." 3In short, the DOT's proposed
enforcement policy is tantamount to reintroducing federal
bureaucracy and regulation into the airline market, which would
have a chilling effect on competition by discouraging fare wars
that result in significant savings for consumers.

Surprisingly, threats of renewed DOT
regulation of the airline industry have been met with casual
acceptance or, worse, general approval on Capitol Hill. In an
attempt to counter such calls for re-regulation, some legislators
have even suggested that increased subsidization of small carriers
or new industry entrants is the best way to bring more competition
to the industry, thereby ensuring price competition and lower
fares. Such calls for the re-regulation or increased subsidization
of the aviation industry are unjustified. Despite the ebbs and
flows of the volatile airline marketplace, consumers clearly have
benefited significantly since the airline market was deregulated in
the late 1970s.

New
regulations or subsidies will not alleviate any of the perceived
problems that the DOT or some Members of Congress fear may arise.
Reintroducing bureaucratic regulation into the airline marketplace
will only ensure a return to the stagnant, cartel-like markets that
existed before liberalization. There are better solutions to many
of the problems the DOT addresses in its enforcement policy:
solutions that do not require the re-regulation of airline routes
and rates.

The
following five recommendations, if adopted, would do far more to
improve airline competition than could ever be done under the DOT's
regulatory approach:

Privatize the air
traffic control system to reduce congestion and improve safety;

Cut airline fees and
taxes; and

Encourage increased
foreign competition for the domestic marketplace.

HOW THE AIRLINES WERE DEREGULATED

Although federal regulation of the airline
industry can be traced to the Air Mail Act of 1925 and the Air
Commerce Act of 1926, serious economic regulation of commercial
aviation began with passage of the Civil Aeronautics Act of 1938.
This Act created the Civil Aeronautics Authority, which later
became the Civil Aeronautics Board (CAB), and gave the CAB the
power to regulate airline routes, control entry to and exit from
the market, and mandate service rates. Airline safety regulation
would come much later with passage of the Federal Aviation Act of
1958, which created the Federal Aviation Administration (FAA).

The Growth of Regulation

By
the 1940s, federal economic regulation of the airlines was in full
swing. Typical regulatory thinking from the 1940s onward is evident
in a Civil Aeronautics Board report: "In the absence of particular
circumstances presenting an affirmative reason for a new carrier,
there appears to be no inherent desirability of increasing the
present number of carriers merely for the purpose of numerically
enlarging the industry." 4 In effect, the CAB
intentionally limited competition and consumer choice through a
variety of regulatory tools and powers. During the era of airline
regulation from 1938 to 1978, the CAB's anti-competitive powers
included:

Entry restrictions:the authority to determine which airlines
were certified to enter the market or a segment of the market;

Exit restrictions: the
authority to control how and when a carrier could exit the market
or a segment of the market;

Price controls: the
authority to require carriers to file rate tariffs and to approve
and disapprove those rates;

Business structure
restrictions: the authority to control mergers,
acquisition, and joint
ventures;

Route controls: the
authority to determine and micromanage the routes that carriers
could fly and the cities they could serve on those routes;

Service quality
mandates:the authority to
establish service standards for the industry;

Financial controls:
the responsibility to monitor the financial performance and health
of air carriers, including the establishment of the allowed rate of
return for individual
companies;

Cargo regulations: the
authority to determine what type of cargo could be carried on a
plane; and

Employment policy
oversight: the authority to monitor day-to-day employment
policies and practices within the industry.

Neil
Goldschmidt, former U.S. Secretary of Transportation and current
co-chairman of the Airline Competition Committee, a private
Washington, D.C.-based group formed to commemorate the 20th
anniversary of airline deregulation, has noted that this system had
many perverse incentives and effects. 5For example, when Continental
Airlines wanted to initiate service between San Diego and Denver,
the CAB took eight years to approve the new route. Likewise, on one
route from Baltimore to Kansas City to Denver, United Airlines was
allowed to take passengers from Baltimore to either of these two
destinations, but was not allowed to pick up any travelers in
Kansas City who wanted to fly to Denver along the way.

In a
1991 study for the Center for the Study of American Business,
economist Richard B. McKenzie found that the folly of pricing rules
and route restrictions was evident during the days of regulation
within the states of Texas and California. Within their large,
unregulated intrastate markets, Texas and California air fares were
much cheaper than fares for regulated interstate routes of similar
length from Texas and California to other states. In fact, McKenzie
noted that air fares for an intrastate California carrier between
Los Angeles and San Francisco were 30 percent to 50 percent lower
than the fares United Airlines charged for comparable flights.
United was unable to lower its fares at the time because it was
restricted by the CAB from doing so. 6

As
noted by former CAB Chairman Alfred E. Kahn, there were "thousands
and thousands of restrictions on where you must land and where you
may not land and how many stops you can make before you land and
what percentage of your trips can be off-route and who has the
right to do what and with which and to whom." 7Goldschmidt notes that the
government's power to control industry competition had the net
effect of "exclud[ing] nearly every would-be entrant for four
decades." 8And McKenzie notes that the CAB
approved less than 10 percent of airline applications to open new
service routes between 1965 and 1978. 9

Goldschmidt concludes that, overall,
government regulation of the airlines "fostered inefficiency and
stifled innovation. The traveling public was the big loser." 10Somehow, concluded Darryl
Jenkins, director of the Aviation Institute at George Washington
University, "We seem to have forgotten how bad things really were
when government set fares, picked routes and limited new entrants."
11

The Need for Deregulation

The
airline industry's darkest days did not come until turbojet-driven
planes entered commercial use in the late 1950s and early 1960s. As
jets were integrated into the market, the industry experienced
dramatic growth. In the mid-1950s, airlines carried roughly 40
million passengers. By the mid-1960s, they were carrying roughly
100 million passengers; and by the mid-1970s, over 200 million
Americans had traveled by air.

This
steady increase in air travel began placing serious strains on the
ability of federal regulators to cope with the increasingly complex
nature of air travel. Simultaneously, "beginning in 1969, changes
in basic economic conditions and in aircraft technology triggered a
sudden decline in the industry's performance," 12notes Richard H. K. Vietor,
professor of Environmental Management at the Harvard School of
Business Administration and author of Contrived Competition:
Regulation and Deregulation in America. The onset of high
inflation, low economic growth, falling productivity, rising labor
costs, and higher fuel costs devastated the airlines, and
"regulators, in their initial efforts to cope with these problems,
only made matters worse." 13

The
CAB encouraged the formation of cartels, disallowed new route
requests, and restricted airline capacity. Decades of inefficient
regulation began to take its toll on air carriers. The increasing
inflexibility of federal regulation made it virtually impossible
for carriers to respond to these problems. Flights were less full,
industry profits were dropping, and consumer prices were
higher.

By
the mid-1970s, the CAB began to recognize its inherent inability to
deal with the increasingly complex airline industry and the
macroeconomic problems that were plaguing it. Remarkably, the CAB
defied traditional regulatory practice and asked Congress to take
away much of its rulemaking authority so that the airlines could
operate freely in the marketplace, industry competition could be
increased, and consumer prices thereby could be lowered.

Two
CAB chairmen, John Robson (from 1975 to 1977) and Alfred E. Kahn
(the late 1970s), embarked on a bold plan with two goals: radical
reform of airline regulation and eventual abolition of almost all
rules and the CAB itself. The CAB received support from
congressional Democrats, led by Senator Edward Kennedy (D-MA), who
sponsored legislation to liberalize the airline market in order to
improve efficiency, encourage growth, and (most important) reduce
prices. The Airline Deregulation Act of 1978 was passed by Congress
and signed into law by President Jimmy Carter on October 24, 1978.
In effect, this Act and the subsequent Civil Aeronautics Board
Sunset Act of 1984 provided for the complete deregulation of the
nation's airline market through the decontrol of prices, freedom of
entry into and exit from the marketplace, complete freedom for
mergers and alliances, elimination of service standards and
requirements, and an end to route authorization.

Since 1978, the federal government's only
important regulatory role in the airline market has been to
establish and enforce safety standards through the Federal Aviation
Administration. However, it is worth noting that the Airline
Deregulation Act did not address two important facets of the
airline industry in which government remains an important force:
the air traffic control system and the ownership and maintenance of
airports. A variety of government entities and officials remain in
control of these important components of aviation infrastructure,
and problems have arisen regarding both the technological
obsolescence of the air traffic control system and the
mismanagement of the nation's airports. This has created additional
safety concerns regarding traffic congestion and has led to such
serious problems as runway congestion, "slot" or gate allocation
and availability, and occasional delays for travelers.

HOW AIRLINE DEREGULATION HAS HELPED
CONSUMERS

Despite its shortcomings, airline
deregulation has been overwhelmingly beneficial for consumers.
Typically, economists examining deregulation to see how successful
it has been within the airline industry base their analysis on
three variables: price, safety, and service quality. On each count,
airline deregulation has been a stunning success.

Prices Have Fallen

Consumers probably are most interested in
the potential benefits deregulation can provide in terms of real
price reductions. Airline deregulation has not disappointed
them.

Prices have declined steadily since
deregulation. The best measure
of trends in airline prices is the "yield" (revenue generated per
passenger mile) that airlines receive. The inflation-adjusted 1982
constant dollar yield for airlines has fallen from 12.27 cents in
1978 to 7.92 cents in 1997. This means that airline ticket prices
are almost 40 percent lower today than they were in 1978 when the
airlines were deregulated. Chart
2 illustrates the price decrease.

These reported declines are bolstered by
the recent work of economists Jerry Ellig, senior research fellow
at the Center for Market Processes at George Mason University, and
Robert Crandall, senior fellow in the Economic Studies Program at
the Brookings Institution. In their 1997 study Economic
Deregulation and Customer Choice: Lessons for the Electric
Industry, 14Ellig and Crandall found that real
price reductions of roughly 13 percent occurred as early as two
years after deregulation, that reductions of almost 30 percent were
evident ten years after deregulation, and that the annual value of
consumer benefits generated by deregulation equals $19.4 billion in
1993 dollars.

Prices have fallen at all airportsAirline deregulation might be
considered a failure if fares at small and medium-sized airports
had not declined as they did at large airports, but small and
medium-sized airports have not been denied the benefits of lower
prices and better service. An April 1996 General Accounting Office
study found that "The average fare per passenger mile, adjusted for
inflation, has fallen since deregulation about as much at airports
serving small and medium-sized communities as it has at airports
serving large communities." 15Furthermore, "The average fare
per passenger mile was about 9 percent lower in 1994 than in 1979
at small-community airports, 11 percent lower at medium-sized
airports, and 8 percent lower at large-community airports." 16

Air Travel Is Safer

Consumers obviously would not be happy if
prices fell this much and safety also was reduced in the process.
But the opposite has been true: Safety has improved as prices have
fallen.

Airline safety has improved
since deregulation.Between 1939 and 1978, fatal airplane
accidents averaged six per year. After deregulation, from 1978 to
1997, the average was only 3.5 fatal accidents per year. The safety
record of America's airways is determined more accurately, however,
by examining how many airline fatalities occur annually relative to
the overall number of miles flown by the nation's air carriers. As
Chart 3 illustrates, the
overall safety record of America's airlines has continued to
improve since deregulation: During the 20 years since deregulation,
fatal accidents have averaged 0.0009 per million aircraft miles
flown. During the 40 years before deregulation, on the other hand,
fatal accidents averaged 0.0135 per million aircraft miles
flown.

Airline safety has improved for
airports of all sizes. The GAO also found that "for each
airport group [small, medium-sized, and large], the accident rate
was lower in 1994 than in 1987. The GAO study did not find any
statistically significant differences between the trends in air
safety for airports serving small, medium-sized, and large
communities." 17

Service Quality Has Improved

The
quality of airline service can be measured in many different ways,
including the number of aircraft departures, the total number of
miles flown, the timeliness of service, other programs and
services, and various frills or amenities. On the vast majority of
these counts, the overall quality of airline service has improved
since deregulation.

There are more aircraft
departures than ever before. One method that can be used
to measure service quality is the number of flights available to
consumers before and after deregulation. This provides a good
indication of how many options are available to consumers.
According to the Air Transport Association of America, which
represents the airline industry, the overall number of airline
departures has risen from just over 5 million in 1978 when airlines
were deregulated, to 8.2 million in 1997, a 63 percent increase
over two decades. Chart 4
illustrates the rise in departures after deregulation.

There are more departures for
small, medium-sized, and large airports alike. "The
quantity of air service, as measured by the number of both
departures and available seats, has increased since deregulation
for all three airport groups," according to the 1996 GAO study. 18"Specifically, in May 1995
small-community airports as a group had 50 percent more scheduled
commercial departures than they did in May 1978; medium-sized
community airports had 57 percent more departures, and
large-community airports had 68 percent more departures." 19

Airlines fly more
miles. Airlines also are logging more miles than before
deregulation. Whereas carriers flew roughly 2.5 billion miles in
1978, they logged more than double that number last year alone,
flying approximately 5.7 billion miles in 1997. Furthermore, as Chart 5 illustrates, this trend
increased much more rapidly after deregulation than it did before
market liberalization.

More Americans are flying than
ever before. Airlines are logging more miles because more
Americans are flying than ever before. Although approximately 250
million passengers were carried in 1978, roughly 600 million people
(almost two-and-a-half times as many) traveled by air in 1997. As
Chart 1 showed, this trend
increased more rapidly after deregulation went into effect.

Airlines are more timely than
ever before. Although little historical data are available
to gauge these results, anecdotal evidence indicates that flights
are on time more frequently now than before deregulation.
Development of the airlines' "hub and spoke" system has made many
different routes available to consumers, allowing travelers to
reach their destinations via tightly coordinated routes. Delays
continue within the system, but they are due primarily to the sort
of airport mismanagement that accompanies government ownership of
this important infrastructure component.

New types of services have
become available.Many
unforeseen consumer services and benefits sprang up following
deregulation. For example, the travel agent industry expanded to
assist consumers in booking air passage. This was facilitated by
the development of sophisticated new computerized booking systems,
which recently became directly accessible to consumers through the
Internet. Not only has this development made it easier for millions
of Americans to book air passage tailored to their specific needs,
but it also has created new types of travel and vacation packages
for consumers.

Airlines have developed new
marketing options to serve the newly empowered consumer more
effectively. Frequent flyer miles, for example, are a
widely utilized consumer option that provides substantial discounts
once the minimum number of miles has been logged. Many air
travelers are able to strike time-saving or money-saving bargains
with travel agents or airline reservation attendants, who can bump
travelers to earlier flights or issue them discounted or free
tickets to later flights if they are willing to surrender their
tickets on an overbooked flight. Such bartering options were rare
before deregulation. Consumers also have benefited from the rise of
innovative low-cost carriers and commuter airlines that offer
extremely competitive rates or that serve short-haul or "puddle
jumper" routes. Such carriers crop up periodically to satisfy
demands for cheaper, more frequent flights between certain
destinations.

Frills and amenities may have
declined slightly. Perhaps the only service quality
variable that could be considered a deregulatory disappointment
concerns the lack of airline frills and amenities. As the
cliché goes, there is perhaps nothing worse than airline
food. And outside of magazines for travelers to read or an
occasional in-flight movie, airlines offer little for the consumer
to do on the average flight. But this begs the question of whether
such frills or amenities are a priority for most travelers.
Clearly, most airline customers do not purchase tickets to receive
a five-star dinner and the finest champagnes or wines. They are
looking primarily for the quickest, cheapest path from one
destination to another. Today's deregulated marketplace provides
them with such options. Consumers looking for more expensive frills
and amenities can get them on some airlines by flying first
class.

WHY AIRLINE RE-REGULATION WILL BE BAD FOR
CONSUMERS

The
Department of Transportation's "Proposed Statement of Enforcement
Policy on Unfair Exclusionary Conduct by Airlines" reflects a newly
found willingness to turn back the regulatory clock on the airline
industry. Surprisingly, the DOT's proposed enforcement guidelines
begin with a statement recognizing the undeniable benefits that
deregulation has wrought:

With a minimum of government economic
oversight, the domestic airline industry has generally evolved in
ways that have increased competition, improved the convenience and
usefulness of air service to most people and lowered
inflation-adjusted fares for the nation as a whole. 20

This
acknowledgment, however, not only represents little more than lip
service to the benefits of deregulation, but also is followed by a
bold new re-regulatory agenda for the airline industry. One concern
expressed in the enforcement policy is whether major carriers
exercise exclusionary market power over certain routes and airport
hubs as a result of how slots and gates are allocated and utilized
at major airports. But the concern that dominates the DOT's new
guidelines is the alleged anti-competitive predatory pricing
techniques of major carriers.

The
predatory pricing accusation states in essence that a large carrier
might be acting in an exclusionary or anti-competitive fashion by
pricing "below-cost" for a period to drive new entrants out of the
market. The major carrier is willing to accept losses in the short
term, the theory states, to eliminate the new entrants that operate
on thin profit margins and limited capital resources. Once new
entrants have been driven from the market, the major carrier can
hike its prices to recoup its losses.

"It's a nice-sounding theory, but in
practice such predatory behavior rarely if ever works," notes the
CEI's James Gattuso. 21

To
make the gambit worthwhile, the predator must not only make
monopoly profits at the end, but make enough to compensate for its
lost revenueæplus interest. That's hard to do, especially
since another airline could always enter the market at a later
date. In the history of antitrust law, there have been few, if any
cases of successful predatory pricing. 22

"For
this reason," as the U.S. Supreme Court noted in its 1986 decision
in Matsushita Electric Industrial Company v. Zenith Radio, "there
is a consensus among commentators that predatory pricing schemes
are rarely tried, and even more rarely successful." 23Indeed, Judge Robert H. Bork, noted
legal scholar and author of The Antitrust Paradox: A Policy at War
with Itself, has argued that "predatory price cutting is most
unlikely to exist and...attempts to outlaw it are unlikely to harm
consumers more than would abandoning the effort." 24Bork believes that consumers will
be harmed because "The result [of predatory pricing cases] can only
be to dampen the vigor of price competition." 25

Yet,
ignoring the overwhelming academic evidence against this thoroughly
discredited theory, the DOT's enforcement policy establishes a
detailed plan to review accusations of predatory pricing on a
case-by-case basis and then, if need be, set up trials before
administrative law judges.

This
bears out Gattuso's contention that "rules against below-cost
pricing are likely to cause more harm than good. They are every
weak competitor's dream. If your rival is underpricing you, drag
him into court. The prospects of years of litigation would
certainly make anyone think twice about lowering prices to beat, or
even meet, the competition." 26In other words, companies will
spend more time battling in the courtroom than in the marketplace.
"If courts start to uphold the accusations of predation, they will
have misused the antitrust laws to protect competitors instead of
protecting competition," argue economists Jerry Ellig and Wayne H.
Winegarden in a 1993 study for the Washington, D.C.-based Citizens
for a Sound Economy. 27

With
apparent disregard for the likelihood that it will lead to a flood
of litigation, the DOT's proposed enforcement policy outlines broad
criteria that will allow regulators and administrative law judges
to decide when a carrier has engaged in "unfair exclusionary
practices." Such a violation will be present under this policy when
one or more of the following occurs:

The major carrier adds capacity and
sells such a large number of seats at very low fares that the
ensuing self-diversion of revenue results in lower local revenue
than would be generated by a reasonable alternative response;

The number of local passengers carried
by the major carrier at the new entrant's low fares (or at similar
fares that are substantially below the major carrier's previous
fares) exceeds the new entrant's total seat capacity, resulting
through self-diversion in lower local revenue than would be
generated by a reasonable alternative response; or

The number of local passengers carried
by the major carrier at the new entrant's low fares (or at similar
fares that are substantially below the major carrier's previous
fares) exceeds the number of low-fare passengers carried by the new
entrant, resulting through self-diversion in lower local revenue
than would be generated by a reasonable alternative response.

Problems with DOT's Enforcement
Policy

The
proposed enforcement policy poses many troubling questions that the
DOT has failed to address. For example:

Who should be regarded
as a "major carrier" and subject to these new rules? Is it fair
that only larger carriers should be singled out and targeted for
punishment under the new rules if they lower their fares "too
much"?

When and how would a
fare be judged "substantially below" the major carrier's previous
fares? In other words, how will the DOT know when a carrier is
pricing "below cost"? To make such a determination, DOT assumes
that its regulators, not the marketplace, are the best judges of
the proper price of air service.

Does the DOT have the
statutory authority to re-regulate the airlines unilaterally? Most
antitrust determinations and decisions such as these are handled by
the Antitrust Division of the U.S. Department of Justice, not by
another executive branch agency or an administrative law judge.

If it becomes illegal
for any large carrier to lower prices to compete with smaller
carriers or new entrants, would this discourage fare wars that
benefit consumers shopping for cut-rate bargains? Prohibiting or
discouraging such rate wars undoubtedly would have negative
financial effects on the targeted carriers, affecting their
profitability and their shareholders.

Why should it be a
crime for a company to cut consumer prices? "Telling firms that
they cannot lower prices is no way to help consumers," conclude
Ellig and Winegarden. 28

The
Department of Transportation has not asked or addressed many of
these questions in its new enforcement policy, because there are no
good answers to them. "As a practical matter," argues Darryl
Jenkins, "DOT's proposed guidelines are unenforceable because (1)
they are based on vague, subjective terms and (2) DOT has neither
the resources nor the expertise to apply them uniformly and
fairly." 29

Consequently, if the DOT moves forward
with its plan, America's airline consumers will be the real losers,
since the proposal will discourage price wars and do little to
encourage greater travel choice or better service. For these
reasons, congressional policymakers must realize that the DOT is
acting in an irresponsible and unauthorized manner that runs
counter to both the Airline Deregulation Act of 1978 and the Civil
Aeronautics Board Sunset Act of 1984. Thus, it seems clear that
Congress should not allow the DOT to pursue unilaterally any
further action under its new enforcement policy.

FIVE PRO-COMPETITIVE ALTERNATIVES TO THE
DOT PLAN

There are solutions to many of the
problems addressed by the DOT that do not involve the re-regulation
of airline routes and rates. The following five recommendations, if
adopted, would do far more to improve airline competition than
could ever be done under the DOT's new regulatory proposal:

Privatize airports to expand capacity
and improve infrastructure.Deregulation did nothing to end government
ownership and management of most airport infrastructure. Because of
this, impediments to increased industry competition and efficiency
remain. As noted by Robert W. Poole, Jr., president of the Los
Angeles-based Reason Foundation:

Federal policies, bureaucratic tradition,
and nonmarket thinking have combined to make airport operations a
kind of bureaucratic-socialist enterpriseæwhich the airlines
have long since learned how to manipulate to their advantage. As a
result, incumbent airlines can insulate themselves from new
competition. 30

Privatization of airport infrastructure
would encourage increased capacity and improved efficiency by
allocating gates and landing slots to parties that value them most
highly. 31

Allow
market-based pricing at airports for takeoff times, slots, and
gates. If full-scale privatization of airport
infrastructure proves politically difficult, then at a minimum,
market-based pricing techniques should be utilized. Slot and gate
allocations and fees currently are allocated or set by bureaucratic
rules or random weight charges. This causes significant delays and
lessens competitive entry at many airports. Steven A. Morrison,
professor of economics at Northeastern University, and Clifford
Winston, senior fellow in economic studies at the Washington-based
Brookings Institution, argue that

[T]he inefficiencies due to the slot
system could be eliminated if the systemæwhose very
purpose...is to reduce congestionæwere replaced by congestion
pricingæcharging aircraft for their takeoffs and landings
according to the cost of the delay that each aircraft imposes on
other aircraft. Congestion charges would reduce delays from
congestion by encouraging planes, especially general aviation and
commuter planes, to use congested airports during off-peak periods
or to switch to less congested airports. 32

Not only would such market-based pricing
help alleviate congestion, but it also would encourage greater
competition. Morrison and Winston note that several major American
airports continue to operate under a number of unique regulatory
requirements, including slot restrictions (at New York's LaGuardia
and Kennedy airports, Washington's Ronald Reagan National airport,
and Chicago's O'Hare airport) and perimeter rules (at LaGuardia and
Reagan National), which limit the distance airlines can travel to
or from an airport, and destination restrictions (at Dallas's Love
Field), which limit the number of cities to which an airline can
travel from the airport. Not only do these continuing regulatory
burdens cause delays, diminish competition, and raise consumer
fares, but Morrison and Winston estimate that if they were lifted,
consumers could realize benefits of roughly $1 billion annually.
33

Privatize the
air traffic control system to reduce congestion and improve
safety.America's air traffic
control system is technologically obsolete and inefficient. As a
federal entity, the air traffic control system is subject to
cumbersome procurement rules and costly labor rules and
restrictions. Moreover, as is true with most federally controlled
entities, there is little accountability to customers (in this
case, both travelers and airlines), and little effort is made to
price airport access or air travel times efficiently.

The solution to these problems is
privatization. The federal air traffic control system should be
converted into a private corporation funded by user fees. In a
privatized market, the corporation would implement policies to
encourage fewer delays, less congestion, simpler and less expensive
procurement practices, and safer air travel through superior
technological innovation. Experiments in other countries with air
traffic control privatization have proven successful, notes Daniel
M. Kasper, co-chairman of the transportation industry program at
Coopers & Lybrand in Boston: "Following the corporatizing of
their air-traffic control systems, the cost of handling flights in
Australia and New Zealand has dropped almost 25%; flight delays
have been reduced; and the time required to buy and put in place
modern technologies is shorter than it used to be." 34

Reduce airline
fees and taxes. Air carriers face a stifling variety of
taxes and fees, including excise taxes, fuel taxes, passenger
ticket taxes, cargo taxes, and arbitrary landing fees. As the
adjoining table documents, these taxes and fees cost the industry
roughly $7.6 billion annually, although the total burden is likely
to be much higher due to the recently imposed 7.5 percent tax on
airline frequent flier miles.

These taxes have imposed a crushing burden
on the airlines during the 1990s, both by lowering corporate
profitability and by restricting industry expansion. According to
Scott C. Gibson of the Washington, D.C.-based Economic Strategy
Institute:

Since 1991, the cumulative effect of the
increase in taxes has exceeded $12 billion, an increase of 48% on
the $25 billion that would have been collected had taxes remained
at the 1989 level. The bulk of this increase is directly passed on
to consumers in the form of higher prices, but given the inability
of the airlines to raise prices on the majority of airfares without
negatively impacting demand, the tax increase essentially decreases
airline revenues.... Had the tax burden not been increased in 1990,
the airline industry would have lost approximately $2 billion
rather that the $13 billion in losses that occurred from 1990 to
1994. 35

This result has led John H. Dasburg,
president of Northwest Airlines Corporation, to conclude that "The
story of the airline industry in the 90's is a textbook example of
the damage that ill-conceived tax policies can do to an industry."
36Lowering this
multibillion-dollar tax burden would do much to increase industry
competition, encourage new entry, and improve service rivalry.

Encourage
increased foreign competition in the U.S. market. Just as
Americans benefit from free trade in other foreign goods and
services, foreign competition in air service could bring them new
service options and lower prices. But government regulations
continue to restrict foreign competition for domestic airline
routes. This policy limits industry competition and consumer
choices. Americans have the uninhibited right to choose freely from
among foreign makers of automobiles, electronic products, clothes,
and countless other goods and services; airline travel should be
accorded the same treatment.

Finally, it is important that policymakers
on Capitol Hill reject inefficient and expensive attempts to
encourage more industry competition through new or increased
federal subsidies to rural areas or to new carriers. The federal
government already operates the Essential Air Service (EAS), which
distributes subsidies to roughly 100 rural communities, a quarter
of which are based in Alaska. As Heritage Foundation Fellow Ronald
D. Utt has noted with respect to the EAS:

Taxpayers should not have to subsidize
those few travelers who chose air travel over unsubsidized
alternatives. Individuals who wish to fly to and from remote
locations should pay the full cost themselves. If they are to be
subsidized, the subsidy should be paid by the local communities
that allegedly benefit from the less costly service. In either
case, if those who benefit from having regularly scheduled air
service to these locations are not willing to bear the full costs
themselves, the service should be discontinued. 37

For many of the same reasons, it would be
a mistake for Congress to begin subsidizing new entrants into the
airline industry as a way to increase competition. Creating new
forms of corporate welfare to encourage industry expansion not only
will result in an expensive new federal spending program, but also
will be tantamount to creating a massive new industrial policy for
the aviation marketplace. Federal intervention of this magnitude
will demand a sizable expansion both of the federal bureaucracy and
of the overall tax burden borne by millions of Americans.

CONCLUSION

The
deregulation of America's airline industry has been a great success
by every statistical measure available. Americans today can fly
from coast to coast more cheaply and frequently than ever before.
Deregulation has converted airline travel from an upper-class
luxury into a transportation option within the reach of millions of
Americans.

It
is therefore somewhat surprising, and quite regrettable, that the
20th anniversary of airline deregulation has occasioned calls for
the re-regulation of prices and operations in the industry. Such a
move is wholly unwarranted, given the record of deregulatory
achievement over the past two decades. "In the end," summarizes
Darryl Jenkins, "DOT's new policy would accomplish exactly what the
Congress and the country left behind 20 years agoæa
regulatory quagmire that eliminates consumers' choice and chills
competition." 38

Consumers, not regulators, are in the best
position to make pro-competitive choices in this industry. Allowing
Washington bureaucrats to reassume their positions as dictators of
rates, routes, and quality would be worse than shortsighted: It
would send the industry back to the regulatory Stone Age. As United
Airlines Chairman Gerald Greenwald aptly concluded in a speech at
the Economic Strategy Institute last November, "there is a huge and
frightening cost in tinkering with the most efficient, innovative
and competitive airline system in the world. We have everything to
loseæand absolutely nothing to gain." 39

Adam D. Thierer is former Alex C. Walker
Fellow in Economic Policy at The Heritage Foundation.

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